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The 'Income Distance' criterion used by the Finance Commission to distribute funds among states favors richer, more industrialized states over poorer, less developed states.
- True
- False
Answer: False
The Income Distance criterion is designed to promote equity and reduce regional disparities. It measures the distance of a state's per capita income from the state with the highest per capita income. Therefore, poorer states with a larger 'distance' receive a higher weightage and a larger share of funds to help them catch up with the richer states.
Small Finance Banks (SFBs) in India are restricted from lending to large corporations and must ensure that at least 75% of their Adjusted Net Bank Credit (ANBC) is directed towards priority sector lending.
- True
- False
Answer: True
SFBs were conceptualized specifically to further financial inclusion by supplying credit to small business units, small and marginal farmers, micro and small industries, and unorganized sector entities. To ensure they stay true to this mandate, the RBI imposes a stringent 75% Priority Sector Lending target, which is significantly higher than the 40% mandated for universal commercial banks.
The Mahalanobis Model, which formed the mathematical foundation of India's Second Five Year Plan (1956-61), prioritized the rapid development of the consumer goods and textile industries.
- True
- False
Answer: False
The Mahalanobis strategy actually prioritized the rapid development of the *capital goods* and heavy industries (like steel, machinery, and power). The logic was that building a strong domestic capital goods base would eventually enable the mass production of consumer goods, ensuring long-term self-reliance and industrialization, albeit at the cost of short-term consumer shortages.
If the price elasticity of demand for a good is exactly equal to one (unitary elastic), a change in price will lead to a proportionate change in quantity demanded, leaving the seller's total revenue completely unchanged.
- True
- False
Answer: True
Total Revenue is calculated as Price multiplied by Quantity. When demand is unitary elastic, a 10% increase in price causes exactly a 10% drop in quantity demanded. The mathematical effects perfectly cancel each other out, meaning the total revenue generated by the seller remains at its maximum, constant level regardless of price movements.
A high Incremental Capital-Output Ratio (ICOR) indicates that an economy is highly efficient in converting capital investments into additional economic output.
- True
- False
Answer: False
ICOR measures the additional unit of capital required to produce one additional unit of output. Therefore, a *low* ICOR signifies high efficiency, advanced technology, and good infrastructure. Conversely, a *high* ICOR indicates inefficiency, structural bottlenecks, and poor capital utilization, meaning massive investments yield relatively little economic growth.
Under the WTO's Agreement on Agriculture (AoA), 'Amber Box' subsidies are considered minimally trade-distorting and are therefore permitted without any quantitative limits.
- True
- False
Answer: False
The WTO categorizes agricultural subsidies into colored boxes. 'Amber Box' subsidies (like Minimum Support Price linked to production) are considered highly trade-distorting and are subject to strict reduction commitments and limits (the 'de minimis' ceiling). It is the 'Green Box' subsidies (like general research or decoupled income support) that are permitted without limits.
The Nominal Effective Exchange Rate (NEER) is a more accurate indicator of a country's international trade competitiveness than the Real Effective Exchange Rate (REER) because it adjusts for domestic inflation differentials.
- True
- False
Answer: False
The reverse is true. NEER is simply an unadjusted, weighted average of a country's currency relative to a basket of its major trading partners' currencies. REER adjusts the NEER for the inflation differentials between the home country and its trading partners, making REER the true measure of a nation's export competitiveness in global markets.
Non-Banking Financial Companies (NBFCs) are regulated by the RBI and are allowed to participate in the payment and settlement system, enabling them to issue cheques drawn on themselves.
- True
- False
Answer: False
While NBFCs are indeed regulated by the RBI and perform bank-like functions such as lending and asset financing, they are fundamentally different from banks. They cannot accept demand deposits (savings/current accounts), do not form part of the payment and settlement system, and consequently, cannot issue cheques drawn on themselves.
Gilt-edged securities are high-yield, high-risk corporate bonds issued by emerging startups to raise venture capital.
- True
- False
Answer: False
The term 'gilt-edged' historically referred to the gilded edges of paper certificates issued by the government. Today, Gilt-edged securities represent the highest grade, safest debt instruments issued by the Central or State Governments (like Treasury Bills and Dated Securities). They carry virtually zero default risk, though they are subject to interest rate risk.
The first wave of nationalization of commercial banks in India, where 14 major private banks were taken over by the government, occurred in the year 1969.
- True
- False
Answer: True
Prime Minister Indira Gandhi nationalized 14 major private banks in July 1969. The primary objective was to align the banking sector with the socialist goals of the state, ensure credit flow to neglected sectors like agriculture and small-scale industries, and expand banking penetration into unbanked rural areas.
Under the Prompt Corrective Action (PCA) framework, the RBI imposes strict restrictions on a bank's dividend distribution, branch expansion, and management compensation if it breaches specific capital and NPA thresholds.
- True
- False
Answer: True
The PCA framework acts as an early intervention mechanism. When a bank's financial health deteriorates (e.g., high Net NPAs, low Capital to Risk-Weighted Assets Ratio, or negative Return on Assets), the RBI invokes PCA to restrict risky activities and force the bank to focus on recapitalization, provisioning, and cleaning up its balance sheet.
The Monetary Policy Committee (MPC) of the RBI, constituted in 2016, consists of 6 members, with the RBI Governor having a casting vote in the event of a tie.
- True
- False
Answer: True
The MPC was established under the amended RBI Act to bring transparency and collective wisdom to interest rate decisions. It comprises three officials from the RBI (including the Governor as the ex-officio Chairperson) and three external experts nominated by the Government of India. The Governor has a second or casting vote if the committee is evenly split.
The proceeds collected from a 'Surcharge' on income tax are distributed between the Central Government and the State Governments based on the Finance Commission's recommendations.
- True
- False
Answer: False
Both Cesses and Surcharges are levied by the Centre for specific purposes or on high-income groups, respectively. Crucially, the Constitution dictates that the proceeds from both Cesses and Surcharges are retained entirely by the Central Government and do not form part of the divisible pool of taxes shared with the States.
A 'Revenue Deficit' implies that the government is borrowing money to finance its routine, day-to-day consumption expenditures rather than for creating productive assets.
- True
- False
Answer: True
Revenue Deficit occurs when the government's net revenue expenditure exceeds its net revenue receipts. Since this deficit is used to fund current consumption (like salaries, subsidies, and pensions) rather than capital formation, it is considered highly undesirable as it adds to the debt burden without generating future income streams to repay it.
The short-run Phillips Curve illustrates a direct, positive relationship between the rate of inflation and the rate of unemployment.
- True
- False
Answer: False
The short-run Phillips Curve demonstrates an *inverse* (negative) relationship between inflation and unemployment. It suggests that policymakers face a trade-off: stimulating the economy to lower unemployment will inevitably lead to higher inflation, while contracting the economy to fight inflation will cause unemployment to rise.
The Consumer Price Index (CPI) assigns the highest weightage to the 'Food and Beverages' category, whereas the Wholesale Price Index (WPI) assigns the highest weightage to 'Manufactured Products'.
- True
- False
Answer: True
This structural difference reflects the target audience of each index. The CPI measures retail inflation affecting the common man, for whom food constitutes the largest share of the household budget (over 45% weight). Conversely, the WPI tracks wholesale transaction prices, where manufactured goods dominate the basket (over 64% weight).
Transfer payments received by the government, such as old-age pensions and unemployment benefits, are included in the calculation of National Income.
- True
- False
Answer: False
Transfer payments are unilateral, one-way payments where no current productive service or good is rendered in return. Since National Income only accounts for the value of newly produced goods and services (factor incomes), including transfer payments would result in double counting and misrepresent the actual productive capacity of the economy.
The Production Linked Incentive (PLI) scheme provides financial rewards to companies based on their total historical capital investments rather than their incremental sales.
- True
- False
Answer: False
The PLI scheme is specifically designed to incentivize *incremental sales* from goods manufactured in domestic units over a defined base year. This output-oriented approach ensures that government funds reward actual production and market success, encouraging companies to scale up manufacturing and integrate into global value chains.
Under the current FDI policy, foreign direct investment up to 100% is permitted under the automatic route for the defense sector, without requiring prior government approval.
- True
- False
Answer: False
While the FDI limit in the defense sector was raised to 100%, the automatic route is only permitted up to 74%. Any FDI beyond 74% (up to 100%) requires prior approval from the Government of India through the Department for Promotion of Industry and Internal Trade (DPIIT), primarily on national security grounds.
The 'Yellow Revolution' in India is associated with the exponential growth in the production of oilseeds, particularly mustard and sunflower.
- True
- False
Answer: True
The Yellow Revolution was initiated in the late 1980s, spearheaded by Sam Pitroda, to achieve self-sufficiency in edible oils. Through the Technology Mission on Oilseeds (TMO), it successfully introduced high-yielding varieties and improved farming practices, significantly boosting the domestic production of oilseeds like mustard, groundnut, and sunflower.